The compression of USD earnings rates has led to a 50% slump in TVL, resulting in large-scale Close Position of leveraged circular strategies.

The native synthetic stablecoin USDe under Ethena saw its total locked-up value plummet from 14.8 billion USD in October to 7.6 billion USD, a decline of over 50% in just one month, setting a record for the largest capital outflow among yield-generating stablecoins in DeFi. Despite the actual on-chain usage continuing to rise, with last month's trading volume surpassing 50 billion USD, the compression of funding rates for perpetual futures caused the Annual Percentage Rate to drop from double digits to 5.1%, lower than the 5.4% borrowing cost of USDC on Aave, triggering widespread liquidation of leveraged cycle strategies. This phenomenon reveals the systemic vulnerability of yield-generating stablecoins in the DeFi ecosystem, as the leverage mechanism amplifies growth cycles while also accelerating capital outflow during downturns.

USDe Operating Mechanism and Market Positioning

Ethena's USDe, as a natively encrypted synthetic stablecoin, maintains price stability in volatile markets through a unique hedging mechanism. This stablecoin holds spot cryptocurrencies as collateral while establishing an equivalent short position in the perpetual futures market, generating returns for holders by capturing funding rate differentials. This design allows USDe to achieve stability soft-pegged to the USD without relying on traditional banking systems, while providing holders with returns far exceeding those of traditional stablecoins.

From the perspective of market positioning, USDe fills the gap of yield-bearing stablecoins in the DeFi ecosystem. Unlike traditional fiat-collateralized stablecoins, the yield of USDe directly stems from the structural characteristics of the cryptocurrency market—funding rates of Perptual Futures. During bull markets, funding rates are usually positive, allowing holders of short positions to earn continuous returns; while under extreme market conditions, funding rates may turn negative, leading to a decline in yields or even a temporary disappearance of returns. This yield model, closely tied to market sentiment, makes USDe an important barometer for measuring the leverage demand in the cryptocurrency market.

Despite the recent significant decline in TVL, the on-chain usage of USDe has shown a contrary rise trend. Last month's on-chain volume exceeding 50 billion USD indicates that the practical utility of this stablecoin in payment, trading, and settlement scenarios has not diminished. This divergence between TVL and usage reveals that USDe's dual attributes as a practical currency and an investment tool are undergoing market reassessment, and the retreat of its speculative positioning may actually promote its broader adoption in real-world application scenarios.

Yield Compression Triggers Leverage Breakdown

The current Annual Percentage Rate offered by USDe is approximately 5.1%, significantly down from the double-digit level at the beginning of the year. This change is mainly due to the general compression of funding rates in Perptual Futures against a backdrop of a weak market environment and reduced leverage demand. The decline in yield directly affects the feasibility of USDe investment strategies, particularly those relying on positive yield spreads in leveraged circular trading. When the yield is higher than borrowing costs, these strategies can generate considerable returns; once the yield falls below a critical threshold, the entire strategy framework quickly loses sustainability.

USDe leverage cycle strategy key data

Initial TVL: 14.8 billion USD (October peak)

Current TVL: 7.6 billion USD (fall 48.6%)

Current APY: 5.1%

Aave borrowing cost for USDC: 5.4%

Negative interest rate differential: 0.3 percentage points

On-chain transaction volume last month: 50 billion USD

Typical leverage multiple: 10 times or higher

The operation mechanism of leveraged cycle strategies has become quite common in the DeFi ecosystem. Investors first deposit staked USDe (sUSDe) as collateral into lending protocols like Aave, then borrow USDC with a high loan-to-value ratio, and then exchange the borrowed USDC back to sUSDe and repeat the entire process. This cyclical operation can achieve an effective leverage of 10 times or more, as long as the yield of USDe remains above the borrowing cost of USDC, the trades can generate stable positive returns. However, when the yield compresses below the borrowing cost, the strategy immediately turns into a loss, triggering a large-scale Close Position wave.

The decline in yield and the unwinding of leverage create a typical reflexive cycle. As early participants begin to Close Position, the selling pressure of sUSDe increases, further suppressing yields and prompting more participants to exit. This self-reinforcing downward cycle is particularly severe in the DeFi ecosystem, as the transparency of smart contracts allows all participants to observe position changes in real-time, leading to a more pronounced herd effect than in traditional financial markets. Although the current negative spread of 0.3 percentage points seems minor, it is sufficient to trigger the forced Close Position conditions of risk management protocols for highly leveraged positions.

The stability of DeFi protocols is under test

The deleveraging process of USDe has been further exacerbated by the sustainability challenges posed by the stablecoin mining setups of certain DeFi protocols. Some protocols have shut down related operations or face doubts regarding their underlying mechanisms, which has weakened market confidence in the yield-bearing stablecoin infrastructure. When leveraged positions are closed, the vulnerability of yield-bearing stablecoins to rapid capital outflows is laid bare; the cyclical mechanism that once amplified TVL growth during the rising cycle similarly accelerates capital outflows during the declining cycle.

Aave and other lending markets play a key role in this process. As one of the largest DeFi lending protocols, the borrowing cost of USDC on Aave has become a benchmark for measuring the profitability of leveraged trading. When the USDe yield falls below this benchmark, not only do new leveraged strategies lose their attractiveness, but existing positions also begin to be liquidated on a large scale. Risk control mechanisms at the protocol level, such as adjustments to loan-to-value ratios and changes in collateral factors, may further accelerate this process, especially during periods of increased market volatility.

Some DeFi protocols focused on yield optimization have begun to reassess their reliance on USDe and related strategies. Some protocols have chosen to suspend stablecoin mining projects, while others are reducing leverage risk by adjusting incentive structures. This cautious approach, while temporarily exacerbating TVL outflows, may promote healthier ecosystem development in the long run. Historically, the DeFi space tends to see more resilient protocol designs and risk management practices emerge after each leverage clean-up, and this adjustment of USDe may serve as a catalyst for the industry's maturity.

Prospect Analysis of Yielding Stablecoins

The current dilemma of USDe raises a fundamental question: Can crypto-native stablecoins establish a sustainable monetary framework in the absence of traditional financial anchors? From a design perspective, USDe represents an ambitious attempt to create a form of currency that is both stable and productive by leveraging the inherent mechanisms of the cryptocurrency market. However, its close association with market leverage demands also inevitably exposes this stablecoin to cyclical fluctuations, with the drastic changes in TVL being a manifestation of this inherent contradiction.

From an investor's perspective, the experience of USDe provides valuable lessons on risk management for income-generating assets. Pursuing high returns often means taking on hidden liquidity risks and leverage risks, which are not easily noticeable during stable market periods but suddenly emerge at turning points. For future investors considering allocating income-generating stablecoins, it is essential to carefully evaluate the sustainability of the return sources, the prevalence of leverage within the ecosystem, and the liquidity conditions under extreme circumstances.

From an innovative perspective, the fundamental design concept of USDe has not lost its value due to recent setbacks. Capturing structural returns in the cryptocurrency market while providing a stable medium of exchange remains an important attraction. Future iterations may focus on reducing dependence on leverage, introducing more dynamic risk management mechanisms, or creating buffer reserves to cope with fluctuations in funding rates. Just as Bitcoin continued to grow after experiencing multiple price collapses, the initial setbacks of USDe-like products may merely be a necessary step in their evolutionary process.

Regulatory and Systemic Risk Considerations

The rise of USDe and similar yield-generating stablecoins has attracted close attention from regulators. Unlike deposits in the traditional banking system, yield-generating stablecoins in the DeFi space lack clear deposit insurance, liquidity support, and regulatory safeguards, making them more vulnerable in the event of a bank run. Regulators may view this significant contraction of Total Value Locked (TVL) as a case study to assess whether and how to incorporate such innovative products into the existing financial regulatory framework.

From the perspective of systemic risk, the deep interconnection between USDe and major DeFi protocols is worth noting. The large-scale Close Position of leveraged cycle strategies not only affects the Ethena protocol itself but may also transmit pressure to the entire DeFi ecosystem through channels such as collateral liquidation and liquidity exhaustion. Although the current scale of DeFi is still relatively small compared to traditional finance, the internal correlation is sufficient to produce significant cross-protocol spillover effects. This interconnectedness reminds us that DeFi is no longer an isolated experimental field, and its stability is increasingly tied to the mainstream encryption market and even traditional finance.

For policymakers, the USDe case presents the classic dilemma of balancing innovation with stability. Overregulation could stifle valuable financial experiments, while a laissez-faire approach might allow for the accumulation of risks. The ideal approach may be to establish a regulatory framework commensurate with the level of risk, focusing on transparency requirements, risk disclosure standards, and leverage limits, rather than outright banning innovation. Such a nuanced regulatory approach can provide necessary protection for consumers while preserving room for beneficial financial innovation.

Industry Lessons and Future Evolution

The USDe TVL halving event provides multiple important lessons for the DeFi industry. First, it reveals the inherent fragility of the growth model based on leverage—leverage amplifies gains in an upward cycle but also accelerates losses in a downward cycle. Second, it highlights the importance of sustainability of returns; sources of returns that rely on specific market conditions (such as positive funding rates) may quickly disappear with changes in the environment. Finally, it reminds us of the limitations of TVL as a success metric; actual usage and network effects are more reliable indicators of long-term value.

Looking ahead, the yield-generating stablecoin space could evolve in two directions. One is to return to a relatively conservative design, emphasizing collateral quality and liquidity management, accepting lower but more stable yields; the other is to manage risks through more complex mechanisms, such as dynamically adjusting collateral ratios, introducing insurance funds, or establishing counter-cyclical buffer capital. Each of these paths has its own advantages and disadvantages, potentially attracting different types of users and application scenarios.

From a broader historical perspective, financial innovation has always undergone periodic experimentation, failure, and refinement. The current challenges facing USDe should not be interpreted as the ultimate failure of the yield-bearing stablecoin model, but rather as a necessary phase in the maturation of this emerging field. Just as money market funds in traditional finance underwent multiple reforms to become reliable cash management tools, crypto-native stablecoins also need time to iterate and develop, ultimately finding a sustainable path that balances innovation and stability.